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Is Carrols Restaurant Group, Inc.’s (NASDAQ:TAST) Capital Allocation Ability Worth Your Time?

Today we’ll evaluate Carrols Restaurant Group, Inc. (NASDAQ:TAST) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Carrols Restaurant Group:

0.079 = US\$33m ÷ (US\$600m – US\$84m) (Based on the trailing twelve months to September 2018.)

So, Carrols Restaurant Group has an ROCE of 7.9%.

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Is Carrols Restaurant Group’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Carrols Restaurant Group’s ROCE is fairly close to the Hospitality industry average of 9.9%. Separate from how Carrols Restaurant Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

In our analysis, Carrols Restaurant Group’s ROCE appears to be 7.9%, compared to 3 years ago, when its ROCE was 5.8%. This makes us think about whether the company has been reinvesting shrewdly.

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Carrols Restaurant Group’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Carrols Restaurant Group has total liabilities of US\$84m and total assets of US\$600m. Therefore its current liabilities are equivalent to approximately 14% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From Carrols Restaurant Group’s ROCE

With that in mind, we’re not overly impressed with Carrols Restaurant Group’s ROCE, so it may not be the most appealing prospect. Of course you might be able to find a better stock than Carrols Restaurant Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.